RETURN ON INVESTMENT

Return on Investment Computation

Based on Operating Income
1. The following selected data pertain to the belt division of Allen Corp. for last year:
Sales $500,000
Average operating assets $200,000
Net operating income $80,000
Turnover 2.5
Minimum required return 20%
How much is the return on investment? (M)
a. 40% c. 20%
b. 16% d. 15% AICPA, Adapted

RESIDUAL INCOME
Residual Income Computation
REB Service Co. is a computer service center. For the month of May 1995, REB had the
following statistics:
Sales $450,000
Operating income 25,000
Net profit after taxes 8,000
Total assets 500,000
Shareholders’ equity 200,000
Cost of capital 6%
Based on the above information, which one of the following statements is correct? REB has a
(M)
a. ROI of 4% c. ROI of 1.6% CMA 0695 3-20
b. Residual income of $(5,000) d. Residual income of $(22,000)

Return on Investment & Residual Income & Units Sold

Questions are based on the following information. G & N 9e
The Axle Division of LaBate Company makes and sells only one product. Annual data on the
Axle Division's single product follow:
Unit selling price $50
Unit variable cost $30
Total fixed costs $200,000
Average operating assets $750,000
Minimum required rate of return 12%
 1. If Axle sells 16,000 units per year, the return on investment should be: (M)
a. 12%. c. 16%.
b. 15%. d. 18%.

2. If Axle sells 15,000 units per year, the residual income should be: (M)
a. $30,000. c. $50,000.
b. $100,000. d. $10,000. G & N 9e

3. Suppose the manager of Axle desires an annual residual income of $45,000. In order
to achieve this, Axle should sell how many units per year? (M)
a. 14,500. c. 18,250.
b. 16,750. d. 19,500. G & N 9e